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5 tips on how to manage your money after a layoff

January 3, 2023, 8:35 PM UTC
Photo illustration of a cardboard box full of office desk supplies on top of a stack of bills.
Some companies may offer severance packages, which can be negotiable.
Photo illustration by Fortune; Original photos by Getty Images (2)

Several major corporations in tech and media industries, such as Twitter, Meta, and Microsoft, have announced massive layoffs last year in response to decades-high inflation rates that hint toward the possibility of a recession. Other industries including food, transportation, and retail have followed suit, which leaves workers wondering if their role will be impacted. 

If you were informed that your job is among those impacted by a mass layoff, it’s important to create a plan right away so you can prepare for the major financial changes that come with being laid off. 

5 things to do with your money when you’re laid off

Certain businesses—such as those that employ 100-plus workers—are required to provide employees a minimum of 60 days’ notice that their role will be impacted by a mass layoff or plant closing under the Worker Adjustment and Retraining Notification (WARN) Act. The hope in providing advance notice is that employees have time to prepare themselves financially in the event they are unemployed for a period of time. 

Some of the best ways to manage your money after a layoff include contacting your human resources department for available severance packages, filing for unemployment to supplement your emergency savings, and having a strategy for dealing with your insurance and 401(k) plans. It’s also important to review your current spending habits and cut back unnecessary purchases while you are without income. 

Contact HR 

When you are laid off, your employer will inform you whether you will be entitled to a severance package which outlines the financial terms of your termination. This generally includes severance pay and benefits based on how long you were employed by your company before you were laid off. It also may include unused paid time off or assistance in finding a new job. 

Most employees are unaware that severance packages can be negotiated the same way an employment offer can be. For instance, if you believe you are entitled to a larger severance payment than your company is offering, you may make a request to increase the payout. Your employer has the option to agree to your offer or hold firm on the original payout amount. 

It’s important to throroughly review your severance package and understand the terms of the agreement before accepting it. Accepting your severance agreement may waive your right to file a wrongful termination suit or file for unemployment insurance. Typically, you will have up to 21 days to accept the agreement. 

It’s important to note that there is no federal or state law that requires employers to provide employees with a severance package—unless you belong to a union or your employment contract states otherwise. 

File for unemployment insurance

If you are laid off, unemployment insurance can help supplement your emergency savings while you look for a new job. It may take up to several weeks for your state to approve your application, so it is important to apply as soon as possible once you know your role will be terminated.

Unemployment insurance eligibility requirements and application approval timelines vary depending on which state you reside in, but it is typical for states to require you to have worked for a minimum amount of time or made a minimum amount of income to qualify. Your state may also use this information to calculate how much benefit you qualify for. 

Most states provide unemployment benefits for up to 26 weeks and require you to file a weekly claim to continue receiving payments. Some states may also have additional qualification requirements, including that you actively look for new employment while you receive the benefit. Review your state’s eligibility requirements before applying. 

Update your insurance plans

If your insurance plans are through your employer, your insurance benefits typically end when you are laid off. 

To combat this, the federal government created the Consolidated Omnibus Budget Reconciliation Act (COBRA) to provide extended access to your previous employer’s health care plan for a limited time after you are laid off, usually lasting up to 36 months. But, you are required to pay a premium and an additional 2% administrative fee to qualify for insurance under COBRA, which usually is more expensive than a typical insurance plan. 

Instead of paying high fees to extend your current coverage, you may be eligible to enroll in coverage under the Affordable Care Act, which typically offers lower premiums based on your income level. You may also qualify for coverage under a spouse’s or parent’s plan—if you are under 26 years old. 

Review your 401(k) plan

There are several options to consider when evaluating what to do with your 401(k) plan when you are laid off, including leaving the funds in your current plan, rolling your plan over to a new employer or IRA, or cashing out entirely. Depending on which you choose, there may be additional tax implications.  

Stick with your current plan: If you have $5,000 or more in your 401(k) plan, you may be able to leave the funds in your current plan. Even though you are allowed to keep the plan, you will no longer be able to contribute or withdraw funds until you hit age 72, which is when you will be required to take minimum distributions from the plan regardless of your employment or retirement status. 

This means you will have to open a new 401(k) plan or IRA if you want to continue saving toward retirement. Additionally, you will not be able to dip into your retirement savings if you face financial turmoil while you are laid off.  

Roll over your plan to a new employer: If you find a new job after being laid off, you can roll over your previous employer’s plan into your new employer’s plan relatively easily by contacting your previous plan’s administrator and completing required paperwork, says Amy Hamasaki, certified financial planner at Mountain Wealth Planning. 

It’s important to note that your new 401(k) plan may have different rules, investment options, and fees. Review your new employer’s plan thoroughly to ensure it aligns your investment needs before deciding to rollover your funds. 

Roll over your plan to an IRA: If you don’t want to use your new employer’s 401(k) plan or it does not offer one, you can transfer your retirement savings into an IRA by contacting your previous plan’s administrator and requesting they disburse the funds to your IRA administrator. 

You can choose between a Roth IRA and a traditional IRA, but there may be additional tax consequences in doing so. For instance, if your retirement savings have been growing tax-deferred in your traditional 401(k) plan, a Roth IRA rollover would be considered a taxable event. 

Cash out your plan: If you do not have an emergency savings built up and are in immediate need of cash, you may be able to cash out the funds from your 401(k). But this should be a last resort after evaluating other alternatives since you will be required to pay ordinary income taxes on the funds and an additional 10% early withdrawal penalty if you have not reached age 59½. 

You also lose out on any compounding interest you would have accumulated if the funds remained invested in a retirement account and will adversely affect your overall retirement savings in the long run. “If you cash out of a 401(k), it is going to take you a lot longer to catch up to where you once were,” says Hamasaki. 

Dial back on spending 

Create a simple budget and stick to it. If you are living off your emergency savings or a variable income to support you following a layoff, you should review your expenses and break them down into three major categories to help you dial back on unnecessary spending. 

Must-haves: A significant portion of your budget should be allocated to paying your bills, which include your mortgage or rent payments, utilities, food, gas, minimum loan payments, and insurance. This also includes student loan payments, which are currently on pause until no later than June 30, 2023

In other words, your must-haves include your fixed expenses that you pay every month. These expenses should be your main priority, especially if you have limited funds. 

Wants: A smaller portion of your budget may go toward paying for things you want, such as traveling home to visit your family during the holidays or purchasing a new outfit to attend a job interview. But you should reduce the amount you typically spend on discretionary expenses if you have recently been laid off. 

“We’re really focusing on paying off the fixed expenses first because when the sky is falling down, you want to really tighten your belt a little bit,” says Hamasaki. This might mean eating in instead of going out to lavish restaurants or readjusting your holiday shopping plans

Savings and paying off debt: If you do not have a job lined up, you may need to stretch your emergency savings to last a longer period of time while you search for a new role. If this is the case, it may be beneficial to put any excess back into your savings for a later date. Additionally, if you have credit card or consumer loan debt, you might want to make additional payments beyond your minimum payment to reduce interest charges. 

If your budget allows, consider following the 50/30/20 rule, which allocates 50% of your after-tax income to must-have expenses, 30% to wants, and 20% to savings or paying down debt. 

For instance, let’s say you have six months of expenses saved up in your emergency savings, totaling $4,000 per month. You should spend $2,000 on your fixed expenses, $1,200 on wants, and $800 on savings or paying down debt.

The takeaway 

If your employer has given you advance notice that your job will be impacted by a mass layoff, it’s important to create a financial plan right away so you can be prepared for the changes that come along with losing your job. 

Thoroughly review your severance package and don’t be afraid to negotiate the terms, such as requesting an extension of your health insurance benefits to avoid paying high premiums under COBRA. If your employer will not be providing severance pay, consider applying for unemployment insurance to meet your immediate financial needs. 

“Not too many employers expect anyone to negotiate with them [on their severance package],” says Hamasaki. “But if they feel that this is putting them in a precarious situation, whether it’s a legal liability or they feel remorseful that they had to let you go, there could be more room for power and negotiation.”

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